Coastal Supervisory Committee & internal auditor conference Carolinas Credit Union League Accelerating the Performance of Your Supervisory Committee July 24, 2015 Ron Parker, CPA

Questions--Background Supervisory CommitteeSupervisory Committee Board of DirectorsBoard of Directors BothBoth Management/StaffManagement/Staff

How many have been in your current position for: –20 years or more –10-20 years –5-10 years –1-5 years –Less than 1 year

Asset size of your Credit Union: –Over $1B –$500M to $1B –$250M to $500M – $100M to $250M –$50M to $100M –$Under $50M

How many CPA ’ s?

If a CPA ’ s wife can ’ t sleep, what does she say? Honey, tell me about your work!

When does a person decide to become a CPA? When he realizes he doesn ’ t have enough personality to be an actuary or an undertaker!

HOW MANY OF YOUR ARE UNDER 35 YEARS OF AGE?

Cowboy Wisdom No one is listening until you Make a mistake Make a mistake There’s two theories about arguin’ with your spouse or a regulator Neither works Neither works Good judgment comes from experience, and a lotta that comes from Bad judgment Bad judgment

When your leadin’ the herd, its a good idea to look back once in a while To see if anyone’s followin’ A bumble bee is considerably faster than a John Deere tractor Don’t judge folks by their relatives Timing has a lot to do with the outcome of a rain dance

Don’t corner something that you know is meaner than youDon’t corner something that you know is meaner than you Always drink upstream from the herdAlways drink upstream from the herd Letting the cat outta the bag is a whole lot easier than puttin’ it back inLetting the cat outta the bag is a whole lot easier than puttin’ it back in A good horse don’t come in no bad colorA good horse don’t come in no bad color The average person thinks he isn’t.The average person thinks he isn’t.

The only way to get rid of a temptation is to yield to it.The only way to get rid of a temptation is to yield to it. The fellow that agrees with everything you say is either a fool or he is getting ready to skin you.The fellow that agrees with everything you say is either a fool or he is getting ready to skin you. I don't know the key to success but I know the key to failure is trying to please everybody.I don't know the key to success but I know the key to failure is trying to please everybody. 99 percent of lawyers give the rest a bad name.99 percent of lawyers give the rest a bad name.

If a matter is mentionable it is generally manageable

Topics Your Credit Union and Your Supervisory CommitteeYour Credit Union and Your Supervisory Committee Credit Union FundamentalsCredit Union Fundamentals Brief History of the Credit Union MovementBrief History of the Credit Union Movement Brief Credit Union PhilosophyBrief Credit Union Philosophy Duties, Responsibilities and Regulatory Requirements—including regulatory audit requirementsDuties, Responsibilities and Regulatory Requirements—including regulatory audit requirements

Topics What Does the Committee DoWhat Does the Committee Do Credit Union Financial Statement LiteracyCredit Union Financial Statement Literacy Credit Union FundamentalsCredit Union Fundamentals Credit Union Financial StatementsCredit Union Financial Statements

Topics Fundamental Accounting ConceptsFundamental Accounting Concepts RISKRISK Compliance …. BSA et. AlCompliance …. BSA et. Al 25 Suggestions to Improve your Committee’s Effectiveness25 Suggestions to Improve your Committee’s Effectiveness Questions You should Consider AskingQuestions You should Consider Asking

PLEASE ASK QUESTIONS AND SHARE YOUR PERSONAL EXPERIENCES WITH THE GROUP!

WHAT ARE YOUR CREDIT UNION’S OR YOUR COMMITTEES CHALLENGE(S) FOR ?

The Credit Union System and How it Functions

Why is a Credit Union Different than other Financial Service Providers?

What Is a Credit Union? with a common bond. Credit unions are financial institutions formed by an organized group of people with a common bond. Members of credit unions pool their assets to provide loans and other financial services to each other. Is this definition accurate today!

Credit UnionsOther Financial Not-for-profit For profit Cooperatives Owned by outside stockholders Owned by membersOwned by outside stockholders

Credit UnionsOther Financials Operated by mostly Controlled by paid boards volunteer boardsand committees and committees IT’S NOT WHAT WE DO…IT’S HOW WE DO IT!

STATE VS. FEDERAL CHARTERS/REGULATOR/INSURER (NCUA)(NCUA) charters and supervises federal credit unions. The National Credit Union Administration (NCUA) is the federal agency that charters and supervises federal credit unions.National Credit Union Administration (NCUA) also insure savings in federal and most (95%) of state-chartered credit (NCUSIF), They also insure savings in federal and most (95%) of state-chartered credit unions through the National Credit Union Share Insurance Fund (NCUSIF), a federal fund backed by the full faith and credit of the United States government.

History of the Credit Union Movement

Credit Union History buy goods at lower than retail prices, and then sold the goods at a savings to members. The history of credit unions began in 1844, with a group of weavers in England, who sold shares to members to raise the capital necessary to buy goods at lower than retail prices, and then sold the goods at a savings to members. In doing so, they became the first credit union. the United States in 1908 The movement then spread to Germany in 1850, Canada in 1901 and the United States in 1908

Cooperative Activity in America The success of the cooperative movement in Canada influenced many Americans, including Pierre Jay, the Massachusetts banking commissioner, and Edward Filene, a Boston merchant.Pierre Jay Edward Filene

Cooperative Activity in America In 1921, Filene created the Credit Union National Extension Bureau, and invested over $1 million of his own money to work towards establishing effective credit union laws in all states and at the federal level. (FILENE INSTITUTE)

leagues Credit unions banded together into leagues on a state-wide basis. Leagues provided financial and legal advice, organizing know-how, and an instrument for credit unions to seek favorable state legislation.

Post WWII Era 1945 there were 8,683 In 1945 there were 8,683 credit unions in the country; by 1955 there were 16,201, and by , the U.S. movement reached its peak of 23,876 credit unions. About 6,000 today!

Post WWII Era merged Since the 1970s, many smaller credit unions have merged into larger ones that offer a wider range of services. membership continues to climb. Although this has caused the number of credit unions to decline, membership continues to climb.

Mergers Will Continue to Cull the CU Herd

Credit Union Philosophy

"not for profit, not for charity, but for service,“ In 1935, when credit unions were helping Americans through the Great Depression, the treasurer of a Midwestern credit union said that credit unions were "not for profit, not for charity, but for service,“ What does this philosophy mean to you and does this philosophy still holds true today?

Seven Cooperative Principles for Credit Unions Voluntary Membership Many cooperatives, such as credit unions, operate as not-for-profit institutions with volunteer board of directors. In the case of credit unions, members are drawn from defined fields of membership.

3. Members’ Economic Participation capital Members are the owners. As such they contribute to, and democratically control, the capital of the cooperative. This benefits members in proportion to the transactions with the cooperative rather than on the capital invested. (HOW MUCH CAPITAL HAVE MEMBERS INVESTED?)

Duties, Responsibilities and Regulatory Requirements of the Supervisory Committee

Questions Who establishes the regulatory requirements for your Committee? Where are those requirements found? What are the key regulatory requirements?

Questions What are the common requirements of all Committees? What powers does the Committee have? What qualifications are required by Committee members?

Regulatory Requirements Federally or State CharteredMay differ depending on whether you are a Federally or State Chartered Credit Union and/or NCUSIFYou are insured by NCUSIF vs. a Private insurer Federally Chartered State Chartered—Federally Insured State Chartered—Privately Insured

§ General responsibilities of the Supervisory Committee. (a) Basic. that the board of directors and management of the credit union— (a) Basic. The supervisory committee is responsible for ensuring that the board of directors and management of the credit union— financial reporting objectives (1) Meet required financial reporting objectives and

§ General responsibilities of the Supervisory Committee. safeguard members’ assets. (2) Establish practices and procedures sufficient to safeguard members’ assets.

(b) Specific (b) Specific. To carry out the responsibilities set forth in paragraph (a) of this section, the supervisory committee must determine whether: (1) Internal controlsestablished effectively maintained (1) Internal controls are established and effectively maintained to achieve the credit union’s financial reporting objectives which must be sufficient to satisfy the requirements of the supervisory committee audit, verification of members’ accounts and its additional responsibilities;

accounting records (2) The credit union’s accounting records and financial reports are promptly prepared and accurately reflect operations and results;

plans, policies, and control procedures properly administered ( 3) The relevant plans, policies, and control procedures established by the board of directors are properly administered; and Policies and control procedures are sufficient to safeguard against error, conflict of interest, self-dealing and fraud. (4) Policies and control procedures are sufficient to safeguard against error, conflict of interest, self-dealing and fraud.

Mandates must: (c) Mandates. In carrying out the responsibilities set forth in paragraphs (a) and (b) of this section, the Supervisory Committee must: reports filed with the NCUA Board (1)Ensure that the credit union adheres to the measurement and filing requirements for reports filed with the NCUA Board under § of this chapter; Perform or obtain a supervisory committee audit (2) Perform or obtain a supervisory committee audit, as prescribed in § of this part; REPORTS FILED WITH THE NCUA BOARD— CALL REPORTS/5500 REPORTS

SUGGESTION READ, DISCUSS AND DOCUMENT YOUR REGULATORY REQUIRMENTS. PREPARE AN ANNUAL REPORT DETAILING HOW YOUR COMMITTEE HAS COMPLIED WITH THE REGULATORY REQUIREMENTS AND SUBMIT TO THE BOARD OF DIRECTORS.

Supervisory Committee Is generally appointed by the _________ and consists of _3-5___ members, one of whom may be a director other than a compensated officer of the board. The term “audit committee” designated by state statute or regulation is the equivalent of a Supervisory Committee. BOARD

Supervisory Committee Term _BOARD_____________The _BOARD_____________ determines the term l 1, 2, or 3 years l Staggered, with one position up for appointment each year l Regular terms expire after the first regular board meeting l One member of the Supervisory Committee may be a Director

Supervisory Committee Leadership chairperson secretary Committee Members select a chairperson and a secretary. The offices of Chairperson and Secretary may be held by the same person.The offices of Chairperson and Secretary may be held by the same person.

Qualifications of a Supervisory Committee Member memberMust be a member of the Credit Union bondableMust be bondable by the Credit Union’s surety bond company

Qualifications of a Supervisory Committee Member Employees and Credit Committee membersnot eligibleEmployees and Credit Committee members are not eligible for membership on the Committee. Experience in bookkeeping, accounting or auditing helpful but not necessary!

Suspension Authority The Supervisory Committee may suspend, by unanimous vote, any ____________, _______________, or ________________ member. Board Member Executive Officer Credit Committee

Suspension Authority If you suspend someone, you must call a special meeting of the _________ to act on the suspension members 7-14 days l The special meeting must be held within _________ after the suspension l The person being suspended must be given an opportunity to present a defense and be given due process

Cowboy wisdom… If you believe that you’re a person of some influence, try ordering someone else’s dog around.

Attendance at Board Meetings MAYThe Supervisory Committee MAY attend Board Meetings, the Supervisory Committee Guides encourages at least one Supervisory Committee representative to attend each Board Meeting

Attendance at Board Meetings Attendance is permitted only with permission of the Board do not have an unqualified right to be presentCommittee members do not have an unqualified right to be present

Minutes of Meetings The SC secretary must maintain records of all actions taken –Monthly or quarterly meetings minutes document significantdiscussions and summarize procedures performed –The minutes should document significant discussions and summarize procedures performed –Minutes should be approved by the Committee at the next scheduled meeting

Confidentiality any information confidential.Supervisory Committee members must keep any information obtained about the Credit Union and member account records confidential.

SC Regulatory Requirements _715Regulation _715 of the NCUA Rules and Regulations sets forth Supervisory Committee audit requirements in standards consistent with the Credit Union Membership Access Act (CUMAA)

Regulatory Audit Requirements l Requirements and standards are linked to asset size and type of audit l Any federal credit union can fulfill its SC audit responsibility by obtaining a _FINANCIAL STATEMENT OPINION audit

Regulatory Audit Requirements must (GAAS) appropriate state authorityFederally insured Credit Unions with assets of 500 MILLION OR OVER must obtain a financial statement audit consistent with generally accepted auditing standards (GAAS) by an independent Certified Public Accountant licensed by the appropriate state authority to perform those services.

Regulatory Audit Requirements $10 millionFederal Credit Unions with assets $10 million may obtain a financial statement audit or A balance sheet audit or Report on the examination of internal control over call reporting under attestation standards or Supervisory Committee Guide audit procedures

Regulatory Audit Requirements Federally insured Credit Unions with <$10 million in assets may obtain any of the optional audits to satisfy their requirement.

Availability of Work Papers The Committee must maintain or make available to NCUA a complete set of the _________ audit working papers unconditional access NCUA staff must have unconditional access to the working papers upon request original

ENGAGEMENT LETTER This requirement should be stipulated in the auditor’s ENGAGEMENT LETTER Availability of Work Papers

Independence of Compensated Auditors and Supervisory Committee Members impartialityExercise impartiality necessary for the reliability of the compensated auditor’s findings fairnessExercise of fairness impair your objectivityObjective and free from influences that may impair your objectivity

Independence of Compensated Auditors and Supervisory Committee Members is perceived objectively member who can act independently. If a Committee member is or is perceived to be unable to objectively perform a specific duty, it is the Supervisory Committee member’s responsibility and the responsibility of the committee as a whole to determine that the task is performed by a member who can act independently.

What Does the Supervisory Committee Do? safeguarding assets, complies with their policies and plans.You must ensure that the Board of Directors is safeguarding assets, and that management complies with their policies and plans. report to members at the annual meeting You must report to members at the annual meeting as stipulated in Article V of the standard by- laws.

What Do We Do? Depends on asset size, complexity, and Supervisory Committee work plan Hire and work with the internal auditor Hire and work with the external auditor or Perform the Supervisory Committee audit

What Do We Do? Review examination and audit findings Meet with Examiner as you or the Examiner may request Research member complaints Complete other recommended procedures

When? ONCE A year At least _ONCE A year, you must complete the Supervisory Committee audit and provide a report on the audit to the BOARD. The audit must cover the period lapsed since the last audit. 2 verification of members’ accounts—DONE ANNUALLY WITH OPINION AUDIT At least once every 2 years you must conduct a verification of members’ accounts—DONE ANNUALLY WITH OPINION AUDIT

Board Plans and Policies To determine what the Board’s plans are you should: –Attend monthly Board meetings or review Board minutes –Review the business plan –Review the business plan of the Credit Union for reasonableness and implementation

Audits Vs. Examinations accuracy of accounting records, and the effectiveness of internal controlsPrimarily focus on the accuracy of accounting records, and the effectiveness of internal controls related to the accounting records Performed by CPA’s or other independent auditors safety and soundnessFocus on safety and soundness concerns, as well as overall controls, regulation compliance and record keeping Performed by applicable federal and/or state regulatory personnel _____________ AuditsExaminations

Management’s Responses to Audit and Examination Findings Request a report from management that outlines actions taken to correct the problems identified Review management’s response to ensure that corrective actions appear reasonable and adequate

Management’s Responses to Audit and Examination Findings did not adopt the corrective actions suggested in the auditor examination report, adequate alternative plan.If management did not adopt the corrective actions suggested in the auditor examination report, they should have developed an adequate alternative plan. If the SC believes that management may not have addressed the problems cited in audit and examination reports, the committee should further review and discuss concerns with management.

Meetings with Examiners Discuss the examination process Areas of focus Findings and reporting process SIGNIFICANTLet the committee know of any SIGNIFICANT findings noted during the examination

THE BOARD AND MANAGEMENT l Complaints about policy or procedure corrections must be followed through to ensure that THE BOARD AND MANAGEMENT implement corrective action Member Complaints Handling member complaints is an essential role for the SC PROFESSIONAL AND CONFIDENTIALComplaints must be handled in an PROFESSIONAL AND CONFIDENTIAL manner

Types of Member Complaints Lending policies and procedures Loan rejection Annual meetings Share withdrawals Dividend rates and terms Credit Union services Other

Hiring an Outside Auditor THE SUPERVISORY COMMITTEE THE SUPERVISORY COMMITTEE must hire the auditor BOARD The BOARD must authorize the budget and approve the expense

Hiring an Outside Auditor Experience level of the individuals who will complete the audit and the firm’s knowledge of Credit Union operations Professional certification of the individuals who will complete or supervise the audit Time period for scheduling the audit Individual or firm’s audit program and approach Time frame for receiving the final audit report Exit meetings with in- charge auditors at the end of the engagement

UNCONDITIONAL Regulatory personnel will be provided UNCONDITIONAL access to the complete set of working papers Engagement Letter Notice in writing of any internal control reportable conditions DATE Specific target DATE of the written report AT LEAST THREE Working papers retained for AT LEAST THREE years from date of report

Regulatory personnel will be provided UNLIMITED access to the complete set of working papers Regulatory personnel will be provided UNLIMITED access to the complete set of working papers Engagement Letter Notice in writing of any internal control reportable conditionsNotice in writing of any internal control reportable conditions Specific target DATE of the written reportSpecific target DATE of the written report Working papers retained for AT LEAST 3 years from date of report Working papers retained for AT LEAST 3 years from date of report

SUGGESTION READ AND DISCUSS THE ENGAGEMENT LETTER (ENTIRE COMMITTEE) AS WELL AS OTHER CONTRACTUAL ARRANGEMENTS

Internal Audit Function When should your Credit Union have an Internal Audit Function? –All large Credit Unions with complex operations should give serious consideration to having an internal audit department –Other Credit Unions are urged in the Supervisory Committee Guide to have internal audit functions

Internal Audit Function SUPERVISORY COMMITTEEEmployment of an internal auditor does not replace the SUPERVISORY COMMITTEE SUPERVISORYCOMMITTEE_ It does not change the function of the SUPERVISORYCOMMITTEE__________ SC Responsibility for the SC audit and the SC functions still resides with the SC Duties of the SC may be performed in part by others BUT

Internal Audit Function Supervisory Committee.Regulators suggest that the internal audit function is most effective when the internal auditor reports directly to the Supervisory Committee. l Other reporting alternative may work within your Credit Union

If Your Committee does Your Audit 1.Obtain a copy of the NCUA Supervisory Committee Guide/Manual and complete: The minimum procedures outlined in Appendix A (or similar procedures) and The final audit checklist outlined in Chapter Focus on key risk areas---risk of significant loss to the credit union. 3. Remember, in very small credit unions you may be the primary control and oversight function!

Credit Union Financial Statement Literacy

You Might be From the Dakota’s If: You got stopped by a state trooper. He asked you if you have an I.D. And you said, 'Bout What?'

2011 Letters to Federal Credit Unions 11-FCU-02 Duties of Federal Credit Union Boards of Directors

Key Provisions--BOD 1.Responsible for the credit union’s general direction and control 2. Carry out duties in good faith, in the best interests of the membership 3. Administer affairs fairly, impartially, and without discrimination

4.Maintain a working familiarity with basic finance and accounting practices 5.Direct operations in conformity with Federal Credit Union Act, NCUA Rules and Regs, other laws, and sound business practices 6.Rely on information prepared or presented by employees or consultants to be reliable and competent

Credit Union Financial Fundamentals

Basic Credit Union Operations --Members --Directors --Savers --Borrowers --Owners --Users of Services

Members Members SaversBorrowers Users of other financial services Profitable and Unprofitable

Is it important to know the profitability of your credit union’s products, services, members and delivery systems?

Basic Credit Union Operation/Transaction Flows We have Savers/Depositors Why Save with Us?

Basic Credit Union Operation/Transaction Flows Savers/Depositors How are Deposit Rates Determined? Under what circumstances might it be appropriate to pay above market rates?

Member Deposits are Funds Borrowed from our Members and others ! Our members and others expect a return on their borrowed funds—dividends!

Member Deposits/Dividends Cost of funds = Dividend rates x Mix of deposits

Basic Credit Union Operation/Transaction Flows What are your most and least costly savings products?

Economic forecast and CU outlook Source: CUNA’s economics and statistics department For updates, visit cuna.org and select “research & strategy,” then “national economic data,” then “data.” Economic forecastFive-year average Economic growth (% change in GDP)1.24%1.90%3.01%3.75% Inflation (% change in CPI) Core inflation Unemployment rate Federal-funds rate average year Treasury rate average2.68%2.35%2.98%3.40% CU outlookFive-year average Savings growth6.00%3.60%3.50%3.00% Loan growth Asset growth Loan-to-share ratio Delinquency rate Net charge-off rate Return on average assets Net worth ratio10.30%10.80%11.00%11.50%

Credit union savings growth Source: CUNA’ s economics and statistics department

Repricing of Member Deposits During what length of time would the following generally reprice? (Repricing is the time period (duration) where we can expect a member deposit amount to change its rate) Term Certificates Money markets Shares Share drafts Other share accounts

Basic Credit Union Operation/Transaction Flows Borrowers/Lending/Loans Why do members borrow from us?

Borrowers/Lending/Loans Rates? Should be commensurate with?

Credit union loan growth Forecas t % % % Source: CUNA’ s economics and statistics department -1.2

Loan Income Loan Income = Loan rates x Mix of loans outstanding

Loan Income Two Credit Unions have equal total loans: (A) has a majority of loans in real estate (B) has a majority of loans in automobiles. Which will have a higher loan income? Higher loan income does not necessarily mean higher NET INCOME!!

CU net loan yield Source: CUNA’s economics and statistics department 8.78 % 5.35 %

Loan Risks credit risk (risk of loss)? Which loan products have the highest and lowest credit risk (risk of loss)? Is there a relationship between the risk of loss and the profitability of the various loan types?

Repricing of Loans During what period of time would the following generally reprice? (Repricing is the time period (duration) where we can expect a loan to change its rate) (Repricing is the time period (duration) where we can expect a loan to change its rate) Real Estate Real Estate Auto Auto Unsecured Unsecured Credit Card Credit Card

CU loan-to-share ratio Source: CUNA’s economics and statistics department 69.0 % 69.4 % 83.4

Which is better, low Loan to Share or high Loan to Share ratio? Low Loan to Share ratio often results in lower income

Asset Liability Management (ALM) ALM Reports are often divided into two primary and two secondary interest rate risk measurements.ALM Reports are often divided into two primary and two secondary interest rate risk measurements. The primary tools that the NCUA uses for measuring interest rate risk are Net Economic Value (NEV) and Net Interest Income (NII).The primary tools that the NCUA uses for measuring interest rate risk are Net Economic Value (NEV) and Net Interest Income (NII). Both tools measure interest rate risk under seven interest rate shock scenarios: basecase (no change – flat), up 100, 200, and 300 basis points (bps) and down 100, 200, and 300 basis points (bps).Both tools measure interest rate risk under seven interest rate shock scenarios: basecase (no change – flat), up 100, 200, and 300 basis points (bps) and down 100, 200, and 300 basis points (bps).

Asset Liability Management (ALM) The secondary or supporting interest rate risk measures are duration and repricing gap. Duration primarily supports the NEV analysis for interest rate risk sensitivity Repricing gap lays out the cash flows and interest rates over different maturity buckets. The report should also provides key assumptions used by the credit union in their analysis.

CREDIT UNION FINANCIAL STATEMENTS

Financial Reports Statement of Financial Condition (BALANCE SHEET)Statement of Financial Condition (BALANCE SHEET) –This statement shows the financial condition of the Credit Union. Assets—What we ownAssets—What we own Liabilities—What we oweLiabilities—What we owe Member’s Equity—What we haveMember’s Equity—What we have

Statement of Income (PROFIT AND LOSS) Reflects all income, expenses, gains and losses of the Credit Union.Reflects all income, expenses, gains and losses of the Credit Union.

Statement of Reserves and Undivided Earnings Shows changes in members equity during the period for which it is prepared.Shows changes in members equity during the period for which it is prepared. –It will show the total increases and the total decreases in each account representing the equity (ownership—RIGHT TO ASSETS) of the Credit Union.

Assets - What we OwnEarning Cash and equivalents Loans Investments NCUSIF OtherNon-Earning Cash NCUSIF Property and equipment Other

HOW DO YOU INCREASE OR DECREASE ASSETS?? WHAT IS THE RELATIONSHIP BETWEEN DEPOSIT GROWTH AND ASSET GROWTH?

Liabilities - What we Owe To Members SHARES To Others

Liabilities - What we Owe What portion of our Assets are funded by borrowed funds? All but Member’s Equity (Capital)

Member’s Equity aka Members Capital Assets minus Liabilities Regulatory Capital + OCCI (Other comprehensive income) (Commonly referred as Capital or Net Worth)

Member’s Equity (Capital) – What we Have How can you increase Member’s Equity (Capital) on your Financial Statements? NET INCOME

What is Capital? Capital is not cash It is the accumulated earnings and losses since you started the credit union. It is the accumulated earnings and losses since you started the credit union. Tells you what portion of your assets belong to your members (collectively) and what part is dedicated to your depositors and other creditors Tells you what portion of your assets belong to your members (collectively) and what part is dedicated to your depositors and other creditors

Member Deposits vs. CapitalMember Deposits vs. CapitalMember Deposits vs. CapitalMember Deposits vs. Capital All of our Funds are Borrowed....except Capital!! We have to pay for borrowed funds…we don’t have to pay for Capital!

Liabilities/Capital How much is a typical credit union leveraged? (about 10 to 1) Total Assets = 100% Total Liabilities = 90% Total Capital = 10%

Net Worth and Earnings A Credit Union’s ONLY source of Capital is____________? SUPPLEMENTAL/ALTERNATIVE SOURCES?? NET INCOME

Net Worth and Earnings The primary Capital ratio is the ratio of capital (member’s equity) to assets. What are the two ways to increase your Capital ratio? INCREASE CAPITAL==HOW?? DECREASE ASSETS==HOW??

How much Capital is enough? Prompt Corrective Action Rules Prompt Corrective Action Rules National or Peer AveragesNational or Peer Averages Depends on how much risk your assets and liabilities representDepends on how much risk your assets and liabilities represent Depends on level of growthDepends on level of growth Depends on profitability of CUDepends on profitability of CU Depends on future plansDepends on future plans

PCA What is it? Prompt Corrective Action What are the key provisions? Required and defined actions to be taken when undercapitalized What is 7% or more capital termed? Well capitalized What is 6 to 7% capital termed? Adequately capitalized What is 4 to 6% capital termed? Undercapitalized

PCA 4 to 5 % capital—no capital restoration plan or not implemented timely Significantly undercapitalized 2 to 4 % capital Significantly undercapitalized Less then 2% capital Critically undercapitalized

Prompt Corrective Action (PCA) Mandatory Supervisory Actions –Below 7% - transfer 0.1% of Total Assets to Regular Reserve each month (get back to 7% ASAP!) –Below 6% Develop a Net Worth Restoration planDevelop a Net Worth Restoration plan Limit asset growthLimit asset growth No new member business loansNo new member business loans Discretionary Supervisory Actions The lower you go, the more authority the Regulators take away from management and the Board

INCOME, EXPENSES AND NET INCOME (LOSS)

HOW OUR BUSINESS WORKS Credit unions make money 3 ways: Interest Income—LOANS AND INVESTMENTSInterest Income—LOANS AND INVESTMENTS Non-Interest Income—FEES AND CHARGESNon-Interest Income—FEES AND CHARGES Credit unions spend money 3 ways: Cost of Deposits-- (Cost of Funds)Cost of Deposits-- (Cost of Funds) Operating Expenses-- (cost of people, buildings, etc)Operating Expenses-- (cost of people, buildings, etc) Provision for Loan Losses-- (cost of bad loans)Provision for Loan Losses-- (cost of bad loans)

Revenue/Income - What we Earned Sources of Revenue/Income Sources of Revenue/Income Loans---Loan Income Investments –-- Investment Income Fees, Charges and Other Income

Costs/Expenses Cost of funds--Dividends Provision for loan losses Operating expenses--overhead

Net Income (Loss) Total Income less Total Expenses = Net Income or Loss!

Income Statement Loan and Investment Income (less):Dividends = Margin/Spread

Margin/Spread + Fees and Other Income Provision for Loan Losses - Operating Expenses - Operating Expenses= NET INCOME

Earnings/Net Income What are the 6 ways to increase net income? INCREASE LOAN INCOME INCREASE INVESTMENT INCOME INCREASE FEE OR OTHER INCOME

Earnings/Net Income What are the 6 ways to increase net income? DECREASE PROVISION FOR LOAN LOSSES DECREASE PROVISION FOR LOAN LOSSES DECREASE DIVIDENDS DECREASE DIVIDENDS DECREASE OPERATING EXPE NSES DECREASE OPERATING EXPE NSES

What is ROA? ROA stands for Return on Assets (or Return on Average Assets) It is a standard measure of profitability in financial institutionsIt is a standard measure of profitability in financial institutions It allows you to compare your profitability to other credit unions of any size (as it is based on Asset size)It allows you to compare your profitability to other credit unions of any size (as it is based on Asset size) It tells you how effectively the credit union is using its Assets and LiabilitiesIt tells you how effectively the credit union is using its Assets and Liabilities

Credit Union ROA and Capital Ratio

Sources of Non-Interest Income Not Just Fees!!! Fee Income – NSF and late loan feeFee Income – NSF and late loan fee Service Revenues –Overdraft ProtectionService Revenues –Overdraft Protection Commission Income –sales of somethingCommission Income –sales of something Interchange Income – Debit and Credit cardsInterchange Income – Debit and Credit cards Other Non-Interest Sources – CUSO selling some product or serviceOther Non-Interest Sources – CUSO selling some product or service

Some Fundamental Accounting Concepts

Fundamental Accounting Concepts Fundamental Accounting Concepts Most assets and liabilities are recorded at cost. Some assets are marked to market i.e. generally valued at the lower of cost or market. Some investments and assets held for sale (loans) for example

Fundamental Accounting Concepts Most of the numbers on a Credit Unions financial statements are fairly well defined (not many judgments or estimates) Cost or cost less depreciation or amortization Lower of cost or market—where market is determined in a formal and orderly market place

Fundamental Accounting Concepts Some assets require a valuation Account! Loans: Not all are collectible so a valuation account is established for probable losses in the loan portfolio

Fundamental Accounting Concepts Investment Accounting: Debt Securities Management intention and ability at acquisition date determines classification as: Available for sale—marked to market through member’s equity (capital) Held to maturity—market values disclosed...no impact on net income or capital.

Fundamental Accounting Concepts If an investment or other asset (such as your investment in the share insurance fund) is deemed to be permanently impaired (OTHER THAN TEMPORARY IMPAIRED-- OTTI) then it is marked to market with the results going through the income statement.

NCUSIF Funding, premiums and dividends National Credit Union Administration In 1970 Congress approved and creating the National Credit Union Administration as an independent agency. National Credit Union Share Insurance Fund Soon after, Congress established the National Credit Union Share Insurance Fund and made the NCUA responsible for its administration.

NCUSIF Funding, premiums and dividends The NCUSIF is funded by deposits from insured credit unions. All Federal credit unions, as well as any state chartered credit union insured by the fund, are required to maintain a balance equaling 1% of all covered deposits in the fund. The NCUA is required to set a target equity balance of at least 1.2% and no more than 1.5% of the total of insured deposits.

NCUSIF Funding, premiums and dividends falls below 1.2%, the NCUA will charge a premium In years when the fund achieves a ratio above 1.3%, In the event that the equity ratio of the fund falls below 1.2%, the NCUA will charge a premium to insured credit unions to maintain the required minimum. In years when the fund achieves a ratio above 1.3%, it will pay out excess funds to insured credit unions in the form of a dividend. Since the fund was recapitalized by credit unions in 1985, the fund has charged one premium in The fund has issued several dividends to member credit unions, the most recent in AFTER 2007—A DIFFERENT STORY!!

Assets---Loans less: The loan account is stated at the amount of loans outstanding less: allowance for loan losses management’s estimate of losses in the loan portfolio The allowance for loan losses which is a deduction from the loan account and represents management’s estimate of losses in the loan portfolio as of the date of the financial statements NEW PROPOSED METHOD— FORWARD LOOKING PROCESS!!

Allowance for Loan Losses and Provision for Loan Losses How many of our numbers require significant estimates by management? Not very many i.e. Most numbers are recorded at cost or fair value (market) or lower of cost or market!

Allowance for Loan and Lease Losses (ALL) and Provision for Loan Losses (PLL) Why all the interest in these two accounts?? ALL—An estimate of losses in the loan portfolio. An increase in the ALL will result in a increase in expenses through the provision for loan losses (PLL).

ALL and PLL The ALL is increased by: Charges to the income statement through the Provision for Loan Losses (PLL) account and Recoveries of loan amounts previously charged off The ALL is decreased by: Charged off loans

Credit union credit quality (as a % of loans) Source: NCUA

RISK

Types of Risk 1.Credit Risk 2.Interest Rate Risk 3.Liquidity Risk 4.Transaction Risk 5.Compliance Risk 6.Strategic Risk 7.Reputation Risk 8.Concentration Risk 9.Growth Risk

Credit Risk The Risk that we won’t get our money back from a loan, investment or other asset!

Measuring Credit Risk Delinquency RatioDelinquency Ratio Net Charge-off RatioNet Charge-off Ratio Earning assets to non-earning assets ratioEarning assets to non-earning assets ratio Trend in credit score or grade mix of your loan portfolioTrend in credit score or grade mix of your loan portfolio Product mix of your loan portfolioProduct mix of your loan portfolio Mix of your investment portfolioMix of your investment portfolio

Interest Rate Risk The risk of loss due to rising or falling interest rates. Arises when a credit union’s assets do not mature or re-price at the same interval as its liabilities If interest rates change, what will happen to: – Net Interest Margin? – Net Income? – Capital?

Interest Rate Risk 1.If interest rates change, what will happen to our earnings? 2.How much capital is at risk?

Measuring Interest Rate Risk Compare rate sensitivity of the credit union’s earning assets to that of its interest-bearing liabilities –Gap Analysis- Income Simulations –Net Economic Value (NEV) Calculations Computer simulations Shock tests –Measuring effect on asset values if interest rates rise or fall 300 basis points

Liquidity Risk Risk that adequate cash will not be available to fund loans, meet withdrawal demands, or pay bills.

Transaction Risk Risk of fraud or operation problems in transaction processing that results in an inability to deliver products, remain competitive, and manage information

Controls Pay attention to: Audit comments on Internal ControlsAudit comments on Internal Controls Regulator comments on Internal ControlsRegulator comments on Internal Controls Internal feedback on Internal ControlsInternal feedback on Internal Controls Consider Fraud HotlineConsider Fraud Hotline

186 Bank Secrecy, Anti- Money Laundering & OFAC

187 illegal activity through tracking certain cash-based transactions.Designed to aid federal government in detecting illegal activity through tracking certain cash-based transactions. file reports daily transactions conducted in currency in amounts over $10,000.Requires credit unions to file reports of daily transactions conducted in currency in amounts over $10,000. recordkeeping funds transfers in amounts over $3,000.Requires recordkeeping on beneficiaries and originators of funds transfers in amounts over $3,000. information gathering and recordkeeping $3,000 and $10,000.Requires information gathering and recordkeeping on sales of money orders, cashier’s checks, and traveler’s checks in amounts between $3,000 and $10,000. exemptionsEstablishes certain exemptions to the currency transaction reporting requirements. Bank Secrecy Act (BSA)

188 Bank Secrecy Act (BSA) Identifying Reportable Transactions Currency Transaction Report (CTR)The Credit Union is required to fill out a Currency Transaction Report (CTR) for ANY cash transaction that totals over $10,000. A cash transaction is one that involves the physical transfer of actual cash between Credit Union personnel and any customer.

189 Bank Secrecy Act (BSA) The Credit Union must: Complete a CTR immediately for any transaction over $10,000. Complete a CTR immediately for any transaction over $10,000. Make sure there is proper ID (driver’s license, passport, armed forces card, government ID or alien registration card). Make sure there is proper ID (driver’s license, passport, armed forces card, government ID or alien registration card). Be as exact as possible. Be as exact as possible. Complete a Log-Entry for purchase of negotiable items for currency of $3,000 or greater. Complete a Log-Entry for purchase of negotiable items for currency of $3,000 or greater.

Strategic Risk Risk of adverse business decisions through management’s or board’s actions or inactions

Reputation Risk Risk of negative public opinion or perception leading to a loss of confidence and/or severance of relationships

Concentration Risk Risk that you have “too many eggs in one basket” Mostly concerned aboutMostly concerned about –Mortgage loans –Member business loans –Loan participations –Loans to single borrower or group –Sub-prime loans –Indirect loans from single or few auto dealers

Growth Rate Risk Risk that rate of change in balances of loans and deposits will be different than you had planned OR Growth of both Assets and Liabilities will out pace Capital growth

What would the following say about a glass half full of water? Pessimist Half Empty Optimist Half Full Half Full Regulator Looks like you’ve got twice as much glass as you need there!

Suggestions 1.Gain a clear understanding of management’s risk tolerance. 2.Understand the level of each risk in your Credit Union and assess and discuss changes in these risk areas.

Suggestions Gain an understanding of how Management Monitors the levels of Risk in these seven areas! Particularly Credit and Concentration Risk!

25 SUGGESTIONS ON HOW TO IMPROVE YOUR COMMITTEE

Many of us have some unique problems…

1. Gain an Understanding of the Duties, Responsibilities and Regulatory Requirements of the Supervisory Committee

Gain an Understanding of the Fundamental Requirements of the Committee 2. Gain an Understanding of the Fundamental Requirements of the Committee

If Possible, Recruit a Board Member to Your Committee as a Liaison to the Board 3. If Possible, Recruit a Board Member to Your Committee as a Liaison to the Board

. Maintain Accurate and Comprehensive Minutes of Your Meetings and Committee Activities 4. Maintain Accurate and Comprehensive Minutes of Your Meetings and Committee Activities

5. Develop a Code of Ethical Conduct for Your Committee

Gain an Understanding of the Audit and Examination Requirements for your Credit Union 6. Gain an Understanding of the Audit and Examination Requirements for your Credit Union

After Reviewing the Regulatory Requirements Determine What, When and Who will be Performing the Requirements 7. After Reviewing the Regulatory Requirements Determine What, When and Who will be Performing the Requirements

8. Develop Procedures for the Hiring of an External Auditor

9. Assess Needs then Recruit, attract, and retain qualified members.

10. Formulate a Supervisory Committee Charter and Obtain Approval by the Board of Directors

Your Charter should define how the committee intends to carry out their responsibilities. Should confirm and define committee duties and responsibilities. Will allow the committee to compare actual performance with duties and responsibilitiesWill allow the committee to compare actual performance with duties and responsibilities Understand the difference between oversight and decision-making functions.Understand the difference between oversight and decision-making functions. Inform the BOD as to their intentionsInform the BOD as to their intentions

11. Review all Minutes of Board of Directors and Committees – To stay informed – To determine policy changes and direction – To determine if actions may be increase risk of loss to member assets

12. Review entire Board Packet including Financial Reports, Ratio’s and Risk Analysis: –Develop a checklist of key data –Allocate responsibilities –Develop questions to be asked –Review annually for value and relevance of information

13. Obtain necessary resources for training and education –Subscribe to credit union periodicals and other financial publications –Develop a reference library –Develop applicable reference web sites— NCUA, CUAM, CUNA, NAFCU, Leagues –Provide for attendance at conferences and seminars –Require a report to committee and board of all educational training

Develop a written plan for working with your External Auditor 14. Develop a written plan for working with your External Auditor

Working with the Outside Auditor Meet with outside auditors before and after the audit field work and discuss: –Audit program and risk assessment processes –Evaluation of internal controls methodology –Type and nature of audit test work performed –Audit report and management letter

Working with the Outside Auditor Inquire of outside auditors as to: –Material weakness or significant deficiencies in internal controls –Errors or irregularities noted during audit –Illegal acts noted during audit –Significant accounting policies

15. Develop a written plan for working with your Internal Audit function

16. Develop a written plan for working with your Regulators

17. Develop and utilize an Annual Work Plan Your plan should contain a monthly outline of what the Committee will be doing throughout the year. DIVIDE UP RESPONSIBILITIES FOR ALL CRITICAL AREAS---PRIMARY AND SECONDARY RESPONSIBILITIES

18. Understand Credit Union Risks and how they are Measured, Monitored and Managed by Management.

RISK ASSESSMENT, MEASURING AND MONITORING

WHAT CAN CAUSE OUR CREDIT UNION SIGNIFICANT LOSSES AND/OR THREATEN OUR FUTURE EXISTENCE!

19. Develop a Risk Assessment Plan that will focus on the areas of greatest risk to the credit union and make certain that audit and oversight processes are focused accordingly.

RISK MANAGEMENT IN WHICH RISK AREAS DO YOUR RISK MANAGEMENT PERSONNEL SPEND THEIR TIME? ARE WE SPENDING THE PROPER AMOUNT OF RESOURCES MONITORING THE KEY RISK AREAS?

RISK MANAGEMENT THE FOLLOWING RISKS ARE GENERALLY MEASURED AND MONITORED BY A SPECIFIC INDIVIDUAL: COMPLIANCE TRANSACTION INTEREST RATE LIQUIDITY

RISK MANAGEMENT THE FOLLOWING RISKS ARE GENERALLY MEASURED AND MONITORED BY VARIOUS GROUPS: CREDIT RISK STRATEGIC RISK REPUTATION RISK

20. Gain an Understanding of credit union financial statement fundamentals

21. Credit Union Financial Statement Analysis

Ratio Analysis: The Ratio Analysis are financial ratios that are grouped into six categories. The first four categories are derived from the four financial areas of the CAMEL Rating System (Capital adequacy, Asset quality, Earnings, asset/Liability management). The remaining two ratio categories are productivity and other ratios. The Ratio Analysis page allows in-depth analysis of fundamental financial ratios and trends. [It is important to remember that peer ratios are simply for comparative analysis and a credit union’s ratios must be evaluated in relation to other available data, including any factors unique to the credit union, prior to drawing any conclusions.

22. Gain an Understanding of Fundamental Accounting Concepts

Prepare an Annual Report of Committee Activities throughout the year and Submit to the Board of Directors 23. Prepare an Annual Report of Committee Activities throughout the year and Submit to the Board of Directors

24. Prepare an Annual Evaluation of the Supervisory Committee. Internal evaluation of the Committee Board and management evaluation of Committee

25. Develop a Watch List of Key Areas of Focus

Develop a list of Questions Your Committee Should be Asking

General Questions Is there a need to: –Improve Business Processes –Reduce or control Operating Expenses –Review our Fee structure If so, what are the steps and time frames. When can we expect to see changes in efficiency and expenses?

Succession Planning future management needsHow often is a projection/assessment of future management needs made? How is the assessment made? The assessment should be an appraisal of the quality and quantity of senior and middle management and should be relative to the size and complexity of the Credit Union.

Succession Planning Has the Credit Union developed a formal written succession plan? When was it last updated and approved by the board of directors? Does the succession plan address the steps to be followed in finding new management personnel in the event of termination, retirement or resignation?

Succession Planning Does the plan address both retirement and extended absences of key Credit Union personnel? Is there a Board of Directors and SC succession plan?Is there a Board of Directors and SC succession plan?

Strategic Planning Does the Credit Union have a written plan and how was the plan developed? What time period does the plan address? How is the strategic plan utilized by management?

Strategic Planning Does it identify Credit Union strengths and weaknesses? Does it outline and define the Credit Union objectives, action plans, goals, etc.? The plan should contain a long-range plan of what we hope to achieve “down the road” and an operational plan that has goals for business units or departments to focus on and action steps needed for the achievement of those goals.

Budgeting annual operating budget?Does Credit Union management prepare an annual operating budget? l Does the board of directors provide input and final approval of all budgets? changes and revisions l Are changes and revisions to the budget approved by the board? written Technology Plan and related budget? l Has the Credit Union developed a formal written Technology Plan and related budget? l What time frame does it cover? l ZERO BASED??

Budgeting explanations of monthly variances and their causeAre explanations of monthly variances and their cause presented in writing to the board of directors by management? evaluating the performance l The final and most important steps are measuring results against the budget, seeking explanations for variances, and evaluating the performance of the persons responsible for carrying out delegated duties and responsibilities.

Pricing of Loans, Dividends and Fees for Member Services Does the Credit Union have a well-defined ALM system that consistently assesses interest rate, credit and liquidity risks? What software or outsourced vendors are used? Who are the members of the ALCO committee? What reports are issued by the ALCO committee and who reviews them?

Field of Membership What is our relationship/dependency with our primary corporate sponsor? How dependent are we on our sponsor group? What are our limitations regarding field of membership expansion?

Questions regarding Profitability and Capital What are our profitability trends (ROA) for the past 5 years? What is our expected profitability (ROA) for the coming year(s)? What is our capital ratio trends for the past 5 years?

Questions regarding Profitability and Capital NCUA web site (ncua.gov)—Financial Performance Reports: –Financial Summary —quarterly financial information for the past 12 months. –Ratio Analysis—Capital adequacy; Assets quality; Earnings; ALM; Productivity; Other Ratios by quarter for past 12 months.

LENDING AND COLLECTIONS QUESTIONS

Lending Who is responsible for assessing the adequacy of loan policies, practices, procedures and internal controls? When were loan policies last reviewed and approved by the board of directors?

Lending What procedures are in place to prevent unauthorized, fraudulent loans being set up by Credit Union employees? If a fraudulent loan were set up by an employee, how and when would the fraud be determined?

Collections How are the number and nature of loan extensions and collection work out loans monitored?

Collections When were collection policies last reviewed and approved by the board of directors? Do collection personnel have the ability to file maintain member loans i.e., advance due dates, waiver of interest/late charges/fees, change addresses or loan codes and other data changes? If so, who and how are file maintenance changes reviewed and monitored?

Recoveries What percentage of charged-off loans do we subsequently recover? (10 to 15% normal) l Are all charged-off loans turned over to a collection agency or attorney? l Are all charged off loans reported to a credit bureau?

Lending must be monitored by appropriate credit risk componentsDelinquency, Charge offs and Recoveries must be monitored by appropriate credit risk components—for example by loan types, credit scores and grades, fields of membership and geographical areas, loan to value at loan date and at present etc. Loan portfolio trends must be divided and monitored by risk areas.

Lending consistencyReview the monthly charge offs by loan type for the past two years for consistency and trends. Compare the Allowance for Loan Losses to Outstanding Loans by loan type by month for the past two years.

Lending What are examiners and auditors saying about our Charge Off and Allowance for Loan Loss policies and procedures? available vs. usedWhat are our available lines of credit trends? Trends of available vs. used amounts. What loans types and areas are of greater concern to management?

Lending possible impairment/losses Loan Participations,How is possible impairment/losses in Member Business Loans, Loan Participations, and Real Estate Loans being monitored (who). Which employees can originate, process and fund a loan? If so, what controls prevent the origination of fictitious loans? advance due datesWho has the ability to advance due dates on loans? What controls prevent the advancing of due dates on delinquent or other loans?

Allowance for Loan Losses Questions

ALL and PLL THE ALL IS GENERALLY THE LARGEST ESTIMATED NUMBER ON THE FINANCIAL STATEMENTS AND IS AN ESTIMATE OF PROBABLE LOSSES IN THE LOAN PORTFOLIO AS OF A DATE IN TIME. The ALL is increased by: –Charges to the income statement through the Provision for Loan Losses (PLL) account –Recoveries of loan amounts previously charged off The ALL is decreased by: –Charged off loans

Allowance for Loan Losses Who determines the adequacy of the allowance for loan losses? How is the adequacy of the allowance determined?

Allowance for Loan Loss Questions loss periodDetermine the loss period being used by management in their assessment of the adequacy of the Allowance for Loan Losses (ALL). Why does management that this loss period is the most reflective of current probable losses? Determine how troubled debt restructuring, watch list loans and other troubled loans are tracked, monitored and included in the assessment of the ALL.

ALL and PLL What factors would you typically consider when assessing probable losses for the ALL computation? Charge off history and trends by loan credit risk area: You need to divide the loan portfolio into credit risk groups—for example: –Automobile loans New vs. used Direct vs. indirect origination Credit score Loan to value Other

ALL and PLL Other factors you would typically consider when assessing probable losses for the ALL computation? Delinquency history and trends by loan credit risk area. Underlying collateral by loan credit risk area Other internal factors—quality of underwriting, collection, recoveries etc. Other external factors—economic factors, unemployment etc.

Allowance for Loan Losses Problems Results bear no relationship to probable losses in portfolio based on credit risk assessment and industry knowledge. Bottom line pressure and related incentives make this account subject to possible manipulation.Bottom line pressure and related incentives make this account subject to possible manipulation. reluctance to charge off timely.Increased delinquency and related reluctance to charge off timely. Directionally Consistent!Should be Directionally Consistent! If all indications are that credit risk is increasing— the ALL should be increasing accordingly!

Investments Unrealized Losses and Gains in Investment SecuritiesMonitor the changes in Unrealized Losses and Gains in Investment Securities in both the available for sale and held to maturity categories. Ask about investment classifications i.e. Available for Sale vs. Held to Maturity for ability and intent.

Investments monitored for impairmentpermanently impairedDetermine how investments are monitored for impairment. Do we have any permanently impaired investments? Determine how many investments do not have a market price and/or are not readily marketable.

OTHER QUESTIONS

Other Questions When was the Credit Union’s last insurance review by an outside specialist? Is insurance and bonding coverage reviewed annually by the board?

Other Questions What were the nature of findings for the past years’ audits by the internal and external auditors and regulatory examiners?

Other Questions Does management respond in writing to findings in reports by: –Internal audit department –External auditor –Regulatory examiners

Other Questions When was the last information systems security review conducted? What were the results? When was our disaster recovery/business continuity plan last reviewed and updated?

Other Questions When was our last compliance review of the following areas conducted: –BSA/OFAC –ACH –ATM/PIN –FACT/Red Flags

Other Questions What other audits and consulting engagements were performed during the past year? What were the findings and follow-up performed?

Accounting Who has the responsibility for ensuring that all accounts are properly and timely reconciled each month? Are all balance sheet accounts reconciled monthly, i.e., the general ledger balance is in agreement with the applicable subsidiary records? Are all balance sheet accounts supported by a subsidiary record or detailed schedule?

Accounting Has our bank or corporate account ever not been reconciled by the end of the following month? Do any bank, corporate or other account reconciliation’s contain reconciling items over 60 days old? If so, what is the nature and dollar amount of these items?

Frauds and Bond Claims Were any frauds committed against the Credit Union during the past year by employees of the Credit Union? If so, how were they detected or determined? What was the nature and amount of the frauds? Was a bond claim filed?

Pending Litigation What was the nature of lawsuits brought against the Credit Union during the past five years?

Contractual Obligations Which Credit Union employees have employment contracts? Is the Credit Union obligated for post-retirement or post-employment benefits for any employee? If so, what types of benefits and which employees are entitled to them? Retirement plan obligations Health, disability and other insurance Memberships

Contractual Obligations Inquire about Defined Benefit Pension Plan (where applicable) current and future Obligations and Commitments!

Pricing of Loans, Dividends and Fees for Member Services Does the Credit Union have a well-defined ALM system that consistently assesses interest rate, credit and liquidity risks? What software or outsourced vendors are used? Who are the members of the ALCO committee? What reports are issued by the ALCO committee and who reviews them?

Board of Directors Has any board member directly or indirectly benefited financially as a result of their position as a board member? Does the board have an ethical conduct or conflict of interest policy?

Final Thoughts! As volunteers, you are the cornerstone of this system. Your continued willingness to volunteer to lead your credit unions, your ongoing belief that the cooperative financial business model of credit unions is an important part of the financial services industry, and your willingness to commit your time to advocate to Congress and NCUA all remain critical during these challenging times. Be active. Be informed. Be visionary. Ask questions. Manage risk diligently, but do not avoid it. With your energy, open-mindedness and commitment to serving your members, credit unions will thrive long into the future. Gigi Hyland, NCUA Board Member

Gratitude is the least of virtues; ingratitude the worst of vices Gratitude is the least of virtues; ingratitude the worst of vices

ADIOUS AND HAPPY TRAILS TO YOU UNTIL WE MEET AGAIN!!